Market

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either:

(a) In the principal market for the asset or liability; or
(b) In the absence of a principal market, in the most advantageous market for the asset or liability.

An entity need not undertake an exhaustive search of all possible markets to identify the principal market or most advantageous market, but it shall take into account all information that is reasonably available.  In the absence of evidence to the contrary, the market in which the entity would normally enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal market or the most advantageous market.

Assumptions Used

An entity shall measure the fair value of an asset or liability using the same assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

Price

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. [para.24]

Price Adjustment

The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs, however, if location is a characteristic of the asset, the price in the principal (or most advantageous) market shall be adjusted for the costs that would be incurred to transport the asset from its current location to that market. [para.25, 26]

Application to Non-financial Assets

In the fair value measurement of a non-financial asset, one should take into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. [para.27]  The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows: [para.28]

(a) A use that is physically possible takes into account the physical characteristics of the asset that market participants would also take into account when pricing the asset (e.g. the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would also take into account when pricing the asset (e.g. the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether the use of the asset that is physically possible and legally permissible generates adequate income or cash flows (considering the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use.

An entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset. [para.29]